Viralytics Limited (OTCQX: VRACY) VLA.AX - AUD ASX Buy

Transcription

1 Joseph Pantginis, Ph.D., (646) Assaf Vestin, Ph.D., (646) Sales (800) , Trading (800) COMPANY NOTE EQUITY RESEARCH April 14, 2015 Healthcare: Biotechnology Viralytics Limited (OTCQX: VRACY) VLA.AX - AUD ASX Buy Company Update Stock Data 52-Week Low - High AUD AUD0.51 Shares Out. (mil) Mkt. Cap.(mil) AUD Mo. Avg. Vol. 301, Mo.Price Target AUD3.84 Cash (mil) AUD24.3 Tot. Debt (mil) AUD Mo.Price Target: Our price target is based on a US$3 price target and an exchange rate of as of 2/24/15 EPS $AUD Yr Jun E Curr Curr 1Q Q (0.03)A (0.05)A (0.03)E 3Q Q (0.02)A 0.00A (0.03)E YEAR (0.05)A (0.05)A (0.05)E Viralytics announced financial results on a half-yearly basis. Results may not add to full year based on increases in share count and rounding Revenue ($AUD millions) Yr Jun E Curr Curr 1Q Q 0.6A 0.0A 1.4E 3Q Q 1.9A 2.5A 1.6E YEAR 2.5A 2.5A 3.0E VLA.AX One-Year Price and Volume History Vol (m) May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr Price VLA.AX; Upcoming Talimogene AdCom Should Boost Visibility on CAVATAK Amgen's oncolytic virus talimogene (T-VEC) will come in front of an FDA Advisory Committee on April 29 for melanoma. We believe this will be an important event shining the spotlight on oncolytic viruses and believe thatviralytics will be a beneficiary of this attention. With positive Phase II CAVATAK data in hand we continue to expect Viralytics' profile to increase in the U.S. Reiterate Buy and AUD3.84 price target Event Amgen's (AMGN-NC) talimogene laherparepvec (T-VEC) is set to be the subject of an FDA Advisory Committee on April 29. The oncolytic virus was also previously assigned an October 27 PDUFA date. The Cellular, Tissue, and Gene Therapies Advisory Committee (CTGTAC) and the Oncologic Drugs Advisory Committee (ODAC) of the FDA will jointly review the biologics license application (BLA), which was submitted for patients with injectable regionally or distantly metastatic melanoma. Impact We believe the Advisory Committee will be instrumental in shining light on the oncolytic virus approach and continue to increase visibility on Viralytics and CAVATAK as a leading player, in our belief. Importantly, we believe upcoming clinical data catalysts will provide a strong boost to our investment case. In 2Q15, we expect final data from the CALM Phase II study in metastatic melanoma as well as initial results from the Phase I/II STORM study in several tumor types. In 3Q15, we expect initial results from the Phase I CANON study in bladder cancer. The Phase Ib MITCI study is also now enrolling patients, combining CAVATAK with Yervoy. As more data are released, we believe it continues to fuel the fire for potential partnering or acquisition of the company. Recall the Phase II CALM study previously met its primary endpoint. The study has shown an irpfs of 38.6%, ORR of 28.1% and one-year survival of 73.3%. The company s primary visibility and investor base has been in Australia and we believe this will quickly change in 2015 based on two primary reasons; 1) clinical data updates from the CAVATAK program and 2) derivative attention and focus brought to oncolytic viruses and CAVATAK s potentially differentiated profile. Bolstering this anticipated increase in visibility is positive Phase II data in hand already as well as a broad clinical development plan for CAVATAK in multiple tumor types. Action We reiterate our Buy rating and AUD3.84. With positive Phase II data in hand, and several ongoing clinical studies with near-term data readouts, we believe Viralytics represents an attractive opportunity for U.S. investors. Important Disclosures & Regulation AC Certification(s) are located on page 9 to 10 of this report. Roth Capital Partners, LLC 888 San Clemente Drive Newport Beach CA Member FINRA/SIPC

2 SUMMARY Ongoing CAVATAK Studies Should Bolster Visibility STORM The company is currently enrolling the STORM study (Sytemic Treatment Of Resistant Malignancies). ~30 patients with various tumor types (advanced melanoma, prostate, lung and bladder) will be enrolled into the study. The trial is being conducted at clinical sites in the U.K. and will test multiple intravenous dosing +/- standard chemotherapy such as docetaxel. The therapy has been safe and well tolerated, to date in the first two cohorts (6 patients) and enrollment and treatment of the third cohort (highest dose level) is currently underway. We expect to receive clinical updates throughout 2015 and into early CANON On January 27, 2015, the company announced the initiation of the CANON study (CAVATAK in Non-muscle invasive bladder cancer). ~30-40 patients with front-line NMIBC are expected to be enrolled into this two-part, open-label, dose-escalation study and the study is being run in the U.K. Part 1 of the study will dose CAVATAK as a monotherapy delivered directly to the bladder through a catheter. Part 2 of the study will combine CAVATAK with mitomycin C by the same route of administration. The goal of the study is to determine safety, tolerability and to establish a recommended Phase II dose for the combination. Yervoy combination study In December 2014, the company received approval to begin a Phase Ib study combining CAVATAK with Yervoy in 26 patients with late-stage melanoma and is now enrolling patients.. This Phase Ib will be a single site, open-label, with the primary endpoint of evaluating the safety and tolerability of multiple intratumoral injections of CAVATAK when given in combination with Yervoy by monitoring DLTs. The secondary endpoint of the study will be to assess the objective response rate of the combination using irrc-who criteria. Patients will be treated with CAVATAK on days 1, 3, 5 and 8 then both therapies will be given on days 22, 43, 64, and 85. Those patients who achieve clinical benefit can continue on CAVATAK dosed every three weeks for up to one year. The CAVATAK dose will be up to a total dose of 3x10 8 TCID50 and Yervoy will be given at the recommended dose of 3 mg/kg. Talimogene laherparepvec In 2011, Amgen acquired BioVex for its product talimogene laherparepvec (T-VEC), with a lead indication in melanoma. Amgen will pay up to $1 billion based on an upfront payment at the time of $425 million followed by up to $575 million in regulatory and sales milestones. Unlike CAVATAK, talimogene uses an engineered virus, in this case herpes simplex 1 (HSV-1). The virus was engineered on several levels, including 1) genetic modification to attenuate the virus to prevent herpes infection, 2) increased potential selectivity for cancer cells and 3) engineered to express the immune adjuvant GM-CSF from within the virus. The talimogene mechanism of action is also based dual acting factors, namely direct killing of the tumor cells by lysis followed by activation of an adaptive immune response. Following the submission of regulatory filings in both the FDA and EMA, U.S. investors are now anticipating the April 29, 2015 Advisory Committee and October, 27, 2015 PDUFA date for talimogene. These filings are based primarily on Phase III data announced at ASCO 2013 from over 400 melanoma patients. The study compared talimogene to GM-CSF in unresected Stage IIIB, IIIC, and IV melanoma patients. The primary endpoint, which was met, was durable response rate (DRR rate of CR and PR lasting at least 6-months). DRR for talimogene was 16% vs. GM-CSF DRR of 2% (p<0.0001). Overall response rate in the study was 26% vs. 6% and a trend toward overall survival was also seen. At ASCO 2014, overall survival data showed a 4.4 month improvement in survival which was approaching statistical significance. Page 2 of 10

3 In March 2014 (Society for Surgical Oncology) retrospective data were presented from the Phase III. These data included information from 295 treated patients (~4,000 lesions tracked with ~50% injected at least once and the rest not). A 50% or greater reduction in tumor size was seen in 64% of injected tumors. One-third of non-injected, non-visceral tumors and 15% of visceral tumors were also reduced by at least 50%. Lastly, following therapy, there were ~35 melanoma related surgeries of which 30% removed all residual disease. We believe Amgen s definitive interest in the oncolytic virus area provides important validation for Viralytics and CAVATAK. Talimogene was further along in development and as the CAVATAK program has matured, we believe it offers a potential competitive advantage on the clinical front. Page 3 of 10

4 VALUATION We assign a Buy rating on shares of Viralytics with a AUD$3.84 price target (US$3 off of exchange rate on 2/24/15). Our valuation of Viralytics is based on our probability-weighted clinical net present value (NPV) valuation model. We believe this method is appropriate in capturing the value of the clinical stage pipeline. It allows for the flexing of assumptions based on key factors such as chance of success, peak sales estimates, and year of commercial launch. Factors which could impede shares of VRACY from reaching our price target include negative results from ongoing clinical trials and financing risk. RISKS Clinical risk (including technology risk) As with all drug development stories, clinical studies have an inherent risk of negative data readouts. Should negative news flow come from ongoing clinical studies, the stock could be negatively impacted in a significant manner. Additionally, we believe there is added layer of risk to the Viralytics story based on the novelty of the technology approach. Oncolytic viruses are still early in their overall acceptance with investors and the medical community alike. Data are positive to date, in our belief, though we believe more data may be needed to solidify the therapeutic approach as well as its fit into the competitive landscape of oncology drugs. Single product risk While Viralytics is developing earlier stage oncolytic virus approaches, we believe the entirety of the company s valuation rests on CAVATAK. Melanoma is currently the lead indication in development and the company has also started development in other tumor types as well. Should there be negative data from the melanoma indication, for example, there could be a significant negative impact on the shares based on a potential increased negative perception on the drug. However, as has been shown with other drugs approved in multiple indications, such as Avastin, failure in one indication does not preclude success in others Regulatory Risk Should Viralytics products successfully complete pivotal registrational studies, there is no guarantee that regulatory agencies would approve these products. Unforeseen issues may arise during clinical development which could impact the approvability of a therapeutic candidate. Financing risk As with all non-profitable biotechnology companies, funding is continuously necessary to fund operations and ongoing clinical studies. Should Viralytics encounter problems in raising sufficient funds to continue its operations, this could significantly impact the stock s valuation. COMPANY DESCRIPTION Viralytics Limited, a biotechnology company, develops oncolytic immunotherapy treatments for a range of cancers in Australia. It offers CAVATAK, a lead product that is in phase II clinical trial for the treatment of late stage melanoma, prostate, lung, and bladder cancer, as well as in phase I/II multi-dose intravenous clinical trial for late-stage melanoma, non-small cell lung, metastatic bladder, and castrate-resistant prostate cancer. The company is also conducting various preclinical studies on CAVATAK for the treatment of breast, multiple myeloma, pancreatic, and malignant glioma cancer, as well as for acute myeloid leukemia and chronic lymphocytic leukemia. In addition, it is developing EVATAK, which is in pre-clinical studies for treating ovarian, prostate, and gastric cancer. The company was formerly known as Psiron Ltd. and changed its name to Viralytics Limited in December Viralytics Limited is headquartered in Sydney, Australia. Page 4 of 10

5 (AUD$ in millions except per share data) Profit & Loss - June fiscal 2011A 2012A 2013A 2014A 2015E 2016E Licensing R&D collaborations Product and Royalties Other revenues Revenues CoGS Gross Profit Gross margin 100% 100% 100% 100% 100% 100% SG&A R&D Other op ex EBIT (2.7) (5.0) (4.3) (5.4) (6.4) (8.2) EBIT margin nm nm nm nm nm nm Depreciation Amortisation Intangibles EBITDA (2.7) (5.0) (4.3) (5.4) (6.4) (8.2) EBITDA margin nm nm nm nm nm nm Non operating expenses Net Interest Income/Other (0.2) Interest expense EBT (2.7) (4.8) (4.1) (5.5) (6.2) (8.1) EBT margin nm nm nm nm nm nm Provision for taxes Net Income (2.7) (4.8) (4.1) (5.5) (6.2) (8.1) Participation of preferred stock Net Income to common (2.7) (4.8) (4.1) (5.5) (6.2) (8.1) net margin nm nm nm nm nm nm NoSH EPS - basic (0.05) (0.07) (0.05) (0.05) (0.05) (0.06) EPS - diluted (0.05) (0.07) (0.05) (0.05) (0.05) (0.06) Source: and ROTH Capital Partners estimates Joseph Pantginis, Ph.D. jpantginis@roth.com Page 5 of 10

6 Half-yearly P&L - June fiscal Dec June June Dec June June Dec June June AUD$ in millions FH1'13A FH2'13A FY'13A FH1'14A FH2'14A FY'14A FH1'15E FH2'13E FY'15E Licensing R&D collaborations Product and Royalties Other revenues Revenues CoGS Gross Profit Gross margin 100% 100% 100% 100% 100% 100% 100% 100% 100% SG&A R&D Other op ex EBITDA (2.6) (1.7) (4.3) (4.0) (1.3) (5.4) (3.1) (3.2) (6.4) EBITDA margin nm nm nm Non operating expenses Net Interest Income/Other (0.22) (0.2) Interest expense EBT (2.5) (1.6) (4.1) (4.0) (1.5) (5.5) (3.0) (3.1) (6.2) EBT margin nm nm nm Provision for taxes Participation of preferred stock Net Income to common (2.5) (1.6) (4.1) (4.0) (1.5) (5.5) (3.0) (3.1) (6.2) net margin nm 0% 0% NoSH EPS - basic (0.03) (0.02) (0.05) (0.05) (0.00) (0.05) (0.03) (0.03) (0.05) EPS - diluted Source: and ROTH Capital Partners estimates Joseph Pantginis, Ph.D. - jpantginis@roth.com Page 6 of 10

7 Balance sheet - AUD$ in M 2011A 3Q12A 2012A 2013A 2014A Assets Cash and cash equ Accounts receivable Inventory Other current assets Current assets Net PPE Intangibles LTA Total assets Liabilities ST notes Accounts payable Other current liabilities Current Liabilities NTF Debt Debt Debt Deferred income Other long-term liabilities Total Liabilities Shareholders equity Common Stock Retained earnings Other equity accts (47.5) (43.7) (52.3) (56.4) (61.9) Total SH equity Total Liabilities & SH equity Source: Joseph Pantginis, Ph.D. jpantginis@roth.com Page 7 of 10

8 Cash flow statement - AUD$ in millions - June fiscal 2011A 2012A 2013A 2014A Cash Flows from Operating Activities R&D Tax Refund Payments to suppliers and employees (3.92) (4.58) (5.69) (7.65) Interest received Interest paid (0.02) (0.01) Net cash (used in) operating activities (3.03) (3.56) (3.93) (5.49) Cash Flows from Investing Activities Purchase of equipment (0.05) (0.02) (0.04) (0.01) Net cash (used in) investing activities (0.05) (0.02) (0.04) (0.01) Cash Flows from Financing Activities Proceeds from issue of shares Proceeds from exercise of options Draw down of convertible notes Costs of fund raising (0.17) (0.32) (0.34) (1.89) Net cash provided by financing activities Net (decrease)/increase in cash held (0.12) 0.88 (0.81) Net Foreign Exchange Difference (0.43) Cash at the beginning of the financial year Cash at the end of the financial year Source: and ROTH Capital Partners estimates Joseph Pantginis, Ph.D. jpantginis@roth.com Page 8 of 10

9 Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Disclosures: ROTH makes a market in shares of Viralytics Limited (OTCQX: VRACY) and as such, buys and sells from customers on a principal basis. Shares of Viralytics Limited (OTCQX: VRACY) may be subject to the Securities and Exchange Commission's Penny Stock Rules, which may set forth sales practice requirements for certain low-priced securities. Shares of Viralytics Limited (OTCQX: VRACY) may not be eligible for sale in one or more states. On September 28, 2010, ROTH changed its rating system in order to replace the Hold rating with Neutral. On May 26, 2011, ROTH changed its rating system in order to incorporate coverage that is Under Review. Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first note written during the past three years. Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliate received compensation for investment banking services in the past 12 month. Distribution of IB Services Firmwide IB Serv./Past 12 Mos. as of 04/14/15 Rating Count Percent Count Percent Buy [B] Neutral [N] Sell [S] Under Review [UR] Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at any given point in time, our investment rating on a stock and its implied price movement may not correspond to the stated 12- month price target. Ratings System Definitions - ROTH employs a rating system based on the following: Buy: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return of at least 10% over the next 12 months. Neutral: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return between negative 10% and 10% over the next 12 months. Sell: A rating, which at the time it is instituted and or reiterated, that indicates an expectation that the price will depreciate by more than 10% over the next 12 months. Page 9 of 10

10 Under Review [UR]: A rating, which at the time it is instituted and or reiterated, indicates the temporary removal of the prior rating, price target and estimates for the security. Prior rating, price target and estimates should no longer be relied upon for UR-rated securities. Not Covered [NC]: ROTH does not publish research or have an opinion about this security. ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright Member: FINRA/SIPC. Page 10 of 10